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HMRC eclipsed in follower notice fiasco

Alasdair Locke successfully argued that the principles found to apply in tax scheme Eclipse 35 were not the same as those of scheme Eclipse 10 and, therefore, a follower notice based on Eclipse 35 could not apply him and other users of Eclipse 10.

27th Jan 2020
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Follower notices (FNs) can be issued to taxpayers who have used a tax avoidance scheme if HMRC can point to a final ruling of a court or tribunal where the principles laid down in that ruling would, if applied to the taxpayer’s case, deny all or part of the tax advantage from the scheme they used.

Effect of an FN

Once an FN has been issued, the taxpayer is in a difficult position. Unless they amend their self assessment to mirror HMRC’s opinion regarding their tax liability, they can be charged a penalty of between 10% and 50% of the tax in dispute. Also, HMRC can issue an accelerated payment notice (APN), requiring them to pay the disputed tax on account before the effectiveness of their own scheme is determined by the courts.

If HMRC is ultimately found to be wrong, both the tax paid on account and any penalty will be refunded to the taxpayer, but they lose the economic benefit of the money in the interim. On the other hand, if HMRC’s view ultimately prevails, the taxpayer will end up having paid up to 50% more tax (and much sooner) than if they had not entered into the scheme.

When properly applied, the regime of FNs and APNs can act as a strong disincentive to tax avoidance schemes. But the case of Alasdair Locke [2019] EWCA Civ 1909 suggests the process may not always be straightforward.

Eclipse 10

In March 2006, Locke joined the Eclipse Film Partners No 10 LLP (Eclipse 10 scheme), using funds he had borrowed for the purpose. In every subsequent year, he claimed income tax relief for the interest on his borrowing (under ICTA 1988 ss 353,362 and latterly  ITA 2007 ss 383,398). 

HMRC enquired into Locke’s SA returns for 2005/06 to 2014/15, and the enquiries were still unresolved by 8 March 2017, when HMRC issued FNs for every year.

The reason HMRC felt able to issue those notices was the Court of Appeal’s ruling in the case of Eclipse Film Partners No 35 LLP. This, HMRC argued, was a scheme which was almost identical in its composition to Eclipse 10. The Court of Appeal ruled that Eclipse 35 was not carrying on a trade and that the monies invested in it by members were not applied for the purposes of a trade.

Locke’s argument

Locke’s legal team argued that, even if Eclipse 10 was found to not carry on a trade (like Eclipse 35), his investment was still entitled to tax relief, as his borrowing satisfied one of the criteria in ICTA 1988 s362(1): 

  1. in purchasing a share in a partnership; or    
  2. in contributing money to a partnership […] where the money […] is used wholly for the purposes of the trade, profession or vocation carried on by the partnership; or
  3. in paying off another loan interest on which would have been eligible for relief under that section.

Locke had always characterised his claim to tax relief on having purchased a share in a partnership. ICTA 1988 s362(1)(a) does not require that the partnership applies the funds to carrying on a trade.

HMRC’s view was that the provisions of ICTA 1988 s362(1)(a) only relate to situations where someone buys a partnership share from a retiring partner, and what Locke had done was properly described as contributing money to a partnership,  falling under ICTA 1988 s362(1)(b), and therefore ineffective if the partnership had no trade.

Court of Appeal judgment

Lady Justice Rose reviewed the Eclipse 35 judgment, and agreed that the structure of the schemes Eclipse 10 and Eclipse 35 were identical.

However, she declined to commit on the question of whether Locke had purchased a share or merely contributed money to the partnership (ie whether ICTA 1988 s362(1)(a) or ICTA 1988 s362(1)(b) was in point).

She noted: “No tribunal or court has yet laid down any principle that HMRC's construction is the correct legal position or given any reasoning as to why Mr Locke's payment cannot be characterised as the purchase of a share in Eclipse 10 for the purposes of section 362(1)(a)”.

Moon shadow 

This absence of prior judgments extended to the Court of Appeal’s Eclipse 35 judgment! To all intents and purposes Eclipse 35’s entire journey through the courts had cruised by on a tacit assumption that all the taxpayers were making a claim under ICTA 1988, s362(1)(b). 

The only principles argued in Eclipse 35 related to whether that partnership (and, by extension, the Eclipse 10 partnership) had been trading. At no stage did the judgment consider the distinction between ICTA 1988 s362(1) subsections (a) and (b), and the impact this would have on the entitlement to tax relief. 

What this meant was that “the principles laid down, or reasoning given, in the ruling” did not speak to the legal principles which applied in Locke’s case. Following the Eclipse 35 principles to Eclipse 10 merely shows that no trade was carried on – it does not address whether tax relief might be due in the absence of trading.

HMRC was not entitled to utilise it as an authority to issue follower notices. Both the FNs and the APNs were quashed.


FNs remain a potent weapon in HMRC’s arsenal. However, this case has shown that HMRC needs to be very precise about what “principles” are being extracted from decided cases. 

It is not enough that the circumstances of two tax avoidance schemes are essentially identical. What matters is whether or not the legal principles which defeated one scheme actually reflect those being argued in another scheme.

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